I saw a video of Newt Gingrich proposing this last night on The Daily Show and it got me thinking.
Currently short term capital gains (in the US) are taxes like income, with a lower rate for long term holdings.
Help me work through this thought experiment: Let’s say Newt gets his way, and starting in Jan 2011 the government sets the capital gains tax to zero. What’s next in the short term, and how does that play out 5/10 years from now?
And if the tax rate is zero, what happens to capital loses? Would/could they still be used to offset gains?
A reduction in government revenue. The tax burden would be tilted in favor of people who earn money from investments over those who earn money through wages and salaries.
But more investment in capital. The stock market would go up, a lot of businesses would release more stock in order to get more capital to invest. Which - ideally - would create jobs, although no guarantees that they’d invest the capital wisely or towards U.S. job creation.
Opposite of what Nemo says…at least potentially. An increase in the amount of investment capital available, which could translate into MORE government revenue (more jobs, more taxes).
No more investment in business whatsoever. The rich are sitting on nearly 2 trillion dollars now and are not investing. Giving them more will just make them into Scrooge McDucks and they can swim in cash.
In the case of the owner-manager of a small business, it would make sense to take less in salary from the business, and instead re-invest that profit back into the business in the hope of a capital gain later on. That would certainly mean lower taxes now, because the capital gain will only be realised at some time in the future.
In the case of an investor in the stock market, it would make sense to give greater preference to shares with the prospect of capital growth, rather than current dividends.
Because “the rich” believe that Obama is going to raise capital gains on a market that is already stagnant. Why would you put your money in the market now? What incentive do “the rich” have to invest currently?
In the market or in productive, job creating investments? Dumping the money in the market might raise stock prices without the underlying basics to justify them - which is a good way to get another crash. They are not investing in new factories because the ones we have are under-utilized already. How is the prospect of no tax going to fix that? Especially if making up the revenue cause taxes on everyone else to rise, or more jobs to be cut, making the problem worse.
Because swimming in cash earning 0.5% (a negative real return, after taxes and inflation) is what they would prefer to do, rather than invest it in new growth opportunities where they could earn much, much more.
As expected, tax policy driven by class envy combined with a total lack of understanding about how jobs and wealth are created in a free society. I suggest you apply for a staff position in the White House, for Nancy Pelosi or Barney Frank immediately.
The vast, vast majority of early stage startup money goes to pay salaries of employees. It varies by industry, but is usually in the 50-80% range. Which is then taxed as W-2 income (as well as FICA tax). By sitting on their money, potential investors are actually denying the government revenue via different means. An early stage investor sinks 100 grand or so into a startup company with (1) a large expectation that he will lose it all and (2) a small expectation that he may make 5x, 10x or 100x his return. VC and PE firms use a portfolio approach to even out these returns over a large number of bets. The returns are generally taxed as capital gains.
But it would actually take a basic grasp of how capital is formed, businesses are started, jobs are created and living standards are improved to understand that fact. Until then, we’ll let Marxist ideology drive the discussion, I suspect.
Why shouldn’t they? Tax rates are lower than even in the days of Saint Ronald of Reagan. The truth is that the wealthy don’t need incentive, they need customers.
Are there any informed economists who think the problem is lack of capital? There is tons of capital. Corporate profits are up by nearly $600 billion a year and are now better than pre-recession. Income for the top 5% has skyrocketed over the last few decades. Corporate cash reserves are at near 2 trillion.
Why would cutting the capital gains rate from 15% to 0% make a difference?
The problem seems to be a lack of security and lack of demand. I don’t see why capital gains would make a difference.
Err…if you made the Capital Gains tax 0% seems to me there would be a huge incentive to unload your investments and lock in your realized profits.
There is a “lock in” effect when there is a capital gains tax. Make it go away and, if I were rich and in an uncertain economy, I’d strongly consider taking the money and run.
You’ll also see a significant shift away from dividend bearing equities towards non-dividend bearing ones, which would distort the market.
It would also make equity capital cheaper as compared to loan capital, further tilting businesses towards reliance on that source. There’s pros and cons to that for both businesses and investors, but it would tend to increase the overall risk profile of people’s portfolios. That means more winners but also more losers.
This is actually one of the advantages to going with lower (or no) capital gains tax rates, since it means people aren’t sitting on investments simply to avoid paying the tax. It gets things flowing more.
And who will they they be taking the money from and running too? Who will they ‘unload’ their investments on?
ETA: Or, what IdahoMauleMan said. Sheesh, too slow
Lovely. They are sitting on tons of money and are not investing in industrial growth. So you figure if they get more, they will suddenly start investing. What do you base that on other than your good programming? It is not logic or evidence, that is for sure.
Profits have been soaring .The corporations are not hurting for money to invest. They are just not investing. So lets give them some more, that’ll work.
The capital has already been formed, can you grasp that?
If you have investments you have been sitting on and they have appreciated it would behoove you to unload them if the capital gains went to 0% (unless you thought the investment so astonishingly good that it will outperform the savings from selling it…not many will be in that category).
Of course you and a lot of other people will have this idea so prices will drop. Eventually they will drop enough to where you do no better selling it at a 0% capital gains rate than you would have when the tax was in effect.
Neat trick then is to take some of the money you just made and buy more investments that are now cheap. That will put upward pressure on prices but I suspect an equilibrium will be reached.
Overall you are giving those with investments a tax holiday and they will take it. Once capital gains is at 0% if you ever raise it again you are screwing people who came into the market (or invested in their business) after the fact.
The only people who will make money are those who can cash out on it today.